USER AND SUBSCRIBER ECONOMICS II: VALUE...

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USER AND SUBSCRIBER ECONOMICS II: VALUE IMPLICATIONS Losses, Network Effects and Growth!

Transcript of USER AND SUBSCRIBER ECONOMICS II: VALUE...

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USERANDSUBSCRIBERECONOMICSII:VALUEIMPLICATIONS

Losses,NetworkEffectsandGrowth!

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My“uncertain”Uberuservaluation

¨ Lotsofassumptions:MyUberuservaluationwasbaseduponassumptionspiledontopofassumptions.

¨ Onpaltrydata:Thoseassumptionswerebaseduponnoisy,datedandsecond-handdata.

¨ Butvaluationstillisuseful¤ Muchoftheuncertaintyiscomingfromthefuture,notfromthedata.

¤ Evenanoisyvaluationmodelcanbeusedtoderivepropositionsaboutvalue(andwhatshoulddrivevalue)

¤ Thosepropositionscanbeusedbyinvestors(toasktherightquestionsofcompanies)andbymanagers(tomakethetradeoffsthatarepartofbusiness).

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1.EstimationversusEconomicUncertainty

¨ Estimationuncertaintycomesfromincomplete,missingormisleadinginformationprovidedbythecompanythatyouarevaluing.

¨ Economicuncertaintyisdrivenbyforthcomingchangesinthebusinessthatthecompanyoperatesin,aswellasmacroeconomicfactors.

¨ Thefirstcanbereducedbyobtainingbetterandmorecompleteinformationbutthelatterwillremain,nomatterhowtimeyouputinanddataanalysisthatyoudo.

¨ WithUber,itiseconomicuncertaintythatisthedominantsource.So,gettingbetterinformationfromUber(eitherasaninvestororwhenitgoespublic)isgoingtodolittletoreduceuncertainty.

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2.Uncertaintyisafactoflife(andbusiness)

¨ Uncertaintyispartandparcelofdoingbusinessandyoucannotwishit,prayitoranalyzeitaway.

¨ Youhavetwochoiceswhenitcomestouncertainty.¤ Youcandealwithitfrontallybymakingexplicitassumptions.Youwillbewrong100%ofthetime,butyouwillbeabletoseewhereyouarewrongandadjustyourvaluation.

¤ Youcangointo"denial"modelandmakeimplicitassumptionsaboutvariables.Whenpricingbylookingatwhatothersarepayingforusersinsimilarcompanies,youaremakingassumptionsaboutallofthevariablesaswell,butthoseassumptionsareimplicit.

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3.Uncertaintycanbevisualized

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UserCostPropositions

• Profitsarebetterthanlosses:Ifyouareaninvestorinabusiness,youwouldratherthatthebusinessmakemoneythanlosemoney.

• Youngcompanieslosemoney:Ifyouhaveayoungcompany,youshouldexpectthecompanytomakelosses,evenifitisavaluablebusiness.

• Notalllossesarecreatedequal:Foryounggrowthcompanies,dependentuponusersorsubscribers,therearegoodwaystolosemoneyandbadwaystolosemoney.

• Investorbeware:Toinvestinthesecompanies,youneedtoknowwhytheylostmoney,notjusthowmuch.

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1.ExistingUserversusNewUserCosts

UserValueProposition1:Amoney-losingcompanythatislosingmoneyprovidingservicetoexistingusers/customersisworthlessthanacompanywithequivalentlosses,wheretheprimaryexpensesarecomingfromcustomeracquisitions.

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2.FixedversusVariableCosts

¨ UserValueProposition2:Acompanywhoseexpensesareprimarilyfixed(willnotgrowwithrevenues)willbeworthmorethananotherwiseidenticalcompanywhoseexpensesarevariable(trackrevenues).

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UserGrowthPropositions

• Foryoungcompanies,wegenerallyviewgrowthasgoodandrewardcompanieswithhighergrowthrateswithhighervalue.

• Notallgrowthiscreatedequal.Somegrowthstrategiescreatemorevaluethanothersandsomemayevendestroyvalue.

• Inauserorsubscriberbasedmodel,therearetwowaysyoucangrowyourrevenues.Oneistogetexistinguserstobuymoreoryourproductorserviceorperhapsotherproductsandservicesthatyoucomeupwith.Theotherisbytryingtoacquirenewusers.

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1.GrowthfromExistingUsers

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2.GrowthfromNewUsers

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GrowthProposition

¨ UserValueProposition3:Acompanythatisgrowingrevenuesbyincreasingrevenues/userisworthmorethananotherwisesimilargrowthcompanythatisderivinggrowthfromincreasingthenumberofusers/customers.

¨ Youngcompaniesfacetradeoffsandthequestionofwhethertoallocateresourcestogetnewusersortrytosellmoretoexistingusersisoneofthose.

¨ AtleastinthecaseofUber,thenumbersseemtoindicatethatifyouhavetoputpriorities,itshouldbeongettingexistinguserstousetheservicemorethantokeeplookingfornewusers.

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UserBusinessPropositions

¨ Lookingatacompanyasauserorsubscriberbasedcompanycanbeusefulindecipheringhowandwhytheymakethestrategicandbusinesschoicesthattheydo.¤ FromBuzzwordstovalue:Auser-focuscanhelpusmakesenseofthefocuson“bigdata”and“networkingbenefits”thatmanyofthesecompanieshaveandlinkthemmoredirectlytovalue.

¤ RevenueModels:Auserfocuscanhelpdeterminewhattypeofrevenuemodel(subscription,advertisingortransaction)willoptimizevalueforacompany.

¤ RealOptions:Doesacompanywithalargeandloyalcustomeruserbasehaveoptionality(leadingtoapremiumbeingaddedtoitsvalue)?Whilerealoptionsarenotoriouslydifficulttovalue,inthiscontext,auserfocuscangiveusdirection.

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1.TheGreat,theGood,theBadandtheUgly!

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NetworkBenefitsandBigData:Keystobeingexceptional¨ UserValueProposition4: Theexceptionalfirmwillbetheonethatisabletofindapathwaytohighvalueperuserandalowcosttoaddinganewuserinamarketwhereitscompetitorsstrugglewitheitherlowvalueperuserorhighcostsofacquiringusers.

¨ Thekeystobeinganexceptionaluser-basedcompanylieinutilizing:¤ NetworkBenefits,toreduceyourcostpernewuser,asyougetbigger.

¤ BigData thatyouhaveaccumulatedonyourusersto(a)customizeexistingproducts/servicestomeetuserpreferences,(b)createnewproductsorservicesthatmeetperceiveduserneedsor(c)fordifferentialpricing

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2.RevenueModels

Subscription Transaction Advertising

UserStickiness(Userlife&RenewalProbability)

High(Highlife&renewalprobability)

Intermediate(Intermediatelife&renewalprobability)

Low(Lowlife&renewalprobability)

RevenueperUserPredictability(Discountrate)

High(LowDiscountRate)

LowPredictability(HighDiscountRate)

Intermediate(AverageDiscountRate)

RevenueperUserGrowth(AnnualGrowthRate)

Low(Lowgrowthrateinrevenues/user)

Low(Highgrowthrateinrevenues/user)

Intermediate(Intermediategrowthrateinrevenues/user)

Growthrateinusers(CAGRin#Users)

Low(LowCAGRin#users)

Intermediate(IntermediateCAGRin

#users)

High(HighCAGRin#users)

Costofaddingnewusers(Cost/NewUser)

High(HighCost/NewUser)

Intermediate(MiddlingCost/New

User)

Low(LowCost/NewUser)

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The“best”revenuemodel

¨ UserValueProposition5: The"optimal"revenuemodelwillvaryacrossfirmsdependingupon wheretheyareinthelifecycle,theproductorserviceofferingandwhethertheyarefocusedonusergrowth,revenuegrowthorrevenuesustainability.

¨ Anadvertising-basedmodelwillallowformuchmorerapidgrowthinafirm'searlyyears,asubscription-basedmodelwillgeneratemoresustainablegrowthandatransaction-basedmodelhasthegreatestpotentialforrevenuegrowthfromexistingusers.

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3.RealOptions

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TheValueofOptionality

¨ UserValueProposition6:Thevalueofoptionalityfromauserbasewillbegreatestatfirmswithlotsofsticky,intenseusers inbusinesseswherethe futureisunpredictable becauseofchangesinproduct/servicetechnologyandcustomertastes.

¨ Thevalueofarealoptioncomesfromexclusivity,andtotheextentthatyouhavesticky,intenseusers,youhaveabasethatyoucanusetoexperimentwithotherproductsandservices,withthevaluescalingupwiththenumberofuses.

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BottomLine

¨ ThemostdirectapplicationsofauserorsubscriberbasedmodelisinthevaluationofcompanieslikeUber,FacebookandNetflix.

¨ Thatsaid,moreandmorecompaniesareseeingbenefitsinshiftingfromtheirtraditionalbusinessmodelstouser-basedones.Apple’sbillioniPhoneusers,Amazon’sseventymillionPrimemembersandMicrosoft’shundredmillion365usersareallgivingthesecompaniestheirversionsofuser-basedmodels.

¨ Understandingusereconomicsiskeytoinvestinginthesecompanies(valuingorpricing)andinmanagingthem.


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